Bankruptcy of shareholder and company’s books
Four of us incorporated a business in 2001 with each of us owning 25% of the shares. The business is doing well and it has a book value of over 500,000 dollars.
The problem: One of the four has declared personal bankruptcy.
The questions:
Will the company’s books be audited by the trustee?
Will any transaction by the company in the last three months / twelve months be liable to be voided?
Will we be forced to provide 25% of the book value (CAD 125,000) to the trustee? The company does not have that much of cash on hand.
What can we do right now to minimize any damage to the company caused by this person’s insolvency?
This person’s bankruptcy has nothing to do with the company. It is due to his family problems.
When a shareholder files for bankruptcy the assets of the individual vest in the trustee and they must be realized upon and distributed among the creditors as stipulated by the Bankruptcy & Insolvency Act.
Essentially what you are facing is that the trustee now owns 25% of the company’s shares and must realize on these shares. Therefore, the trustee must first ascertain a fair market value of the shares and realize on these shares equitably. As a result it may be necessary for the trustee to audit books and records, but it really depends on how they intend to value the company. As far as transactions in the last 3 or 12 months, as long as these transactions have been made in good faith and in the normal course you really shouldn’t have anything to worry about. You will still have to deal with the purchase or sale of the shares, but if the company is in as positive position as you describe you may need to look at a loan to buy-back the shares in question.